Shifting blame for underperformers
A little while ago, I discussed how analysts try to shift blame for failed forecasts. But fund managers are no better, as a study by Meng Wang from Georgia State University shows.
The study used a GPT-based large language model and trained it on the discussion of their funds’ performance fund managers provide. This model allowed to differentiate what reasons fund managers provided for the outperformance of stocks that contributed positively to the funds’ performance relative to their benchmark. Similarly, it allowed to identify and classify the reasons fund managers provided why other stocks underperformed and detracted performance. The simple split between internal reasons (investment process, fund manager skill, etc.) and external reasons (market circumstances, macroeconomic developments, etc.) shows that fund managers are just as good at shifting blame as research analysts.
Reasons blamed for outperforming and underperforming stocks
Source: Wang (2023)
On average, fund managers are 41% more likely to attribute good performance to internal factors than they are bad performance. Unfortunately, the study also found that the fund managers who are more prone to this self-attribution bias tend to trade more and see their performance drop in the subsequent quarter. Alas, nothing new here. Overconfident fund managers think that their success is all based on their skills and not due to luck. And the more overconfident they get, the more they trade and destroy performance. But that poor performance is of course not due to the fund manager’s overconfidence but to external market factors…